Prepaid Cards May Lack Protections of Checking Accounts

Although they are becoming more popular as an alternative to traditional checking accounts, reloadable prepaid cards don’t have to carry federal deposit insurance, as checking accounts do, says a new report from a project of the Pew Charitable Trusts.

The cards are becoming more widely used because holders can use them for direct deposit of their paychecks and to pay bills, just as customers can do with a checking account.

But checking accounts carry up to $250,000 in mandatory deposit insurance per customer through the Federal Deposit Insurance Corporation.

The insurance is quickly available to customers in the event of a bank failure.

Most prepaid cards say they offer “pass through” deposit insurance, by pooling funds in federally insured, third-party bank accounts. But at least one company–American Express–does not, the report found.

Story by Ann Carrns for the New York Times.

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2 Comments on "Prepaid Cards May Lack Protections of Checking Accounts"

  1. It is important to set the record straight with respect to the protections and regulations for prepaid cards.

    Prepaid cards are issued by highly regulated banks or financial institutions. Since 2008, cardholders have received FDIC pass through insurance on the pooled account as long as each cardholder’s identity and balances are maintained by the bank or processor. Network branded prepaid cards come with Zero Liability protections for lost or stolen cards used for unauthorized charges, card replacement and purchase dispute rights. Comparatively, if cash is lost or stolen it is gone forever. Regulation E coverage (part of the Electronic Funds Transfer Act) applies to payroll cards.

    The Network Branded Prepaid Card Association (NBPCA) supports strong disclosure and consumer protections, FDIC deposit insurance coverage for GPR cards, and believes all our members currently offer programs which provide coverage up to $250,000 per cardholder. We also support Reg E coverage for GPR cards, subject to the payroll modified statement provision. These protections are more than adequate to protect the average prepaid card holder.

    Consumers of all types are choosing these financial instruments because they offer a simple and effective way to budget and manage their finances and offer a strong value compared to alternatives. Their growth is a testament to the high levels of satisfaction consumers have with the product.

    Jennifer Tramontana, Network Branded Prepaid Card Association (NBPCA)

    • It’s great to see people talking about prepaid cards. One point that needs to be corrected – Most prepaid debit cards do carry insurance.

      The vast majority of prepaid cards, those that carry the Visa and MasterCard logos and are issued by banks, do have FDIC insurance. The American Express card, and very few others, are not – but these are the exception.

      It’s easy to see if a card has FDIC insurance. Simply go to the card website. Sites are required to include a “Cardholder Agreement” or “Terms and Conditions.” These will state whether the card is insured. Another easy way to find out is to look for a statement somewhere, usually around the bottom of the page that says something like:

      “This card is issued by [NAME OF A BANK] pursuant to a license from [NAME OF CARD ASSOCIATION – VISA OR MASTERCARD] and may be used wherever {NAME OF CARD ASSOCIATION] cards are accepted. [NAME OF A BANK]; Member FDIC.”

      Tips to remember when shopping for prepaid cards:

      • Most prepaid cards are issued by banks, which are highly regulated by numerous state and federal agencies including the Federal Reserve, FDIC and more

      • Most prepaid cards are issued by FDIC member banks and carry FDIC insurance for up to $250,000

      • Most of these cards carry protections from loss or theft too

      • You can easily find this information on the card websites or Cardholder Agreements. Just look for statements like – “This card is issued by [NAME OF BANK]; Member FDIC”

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